Personal service provider
Any company, close corporation or trust that fits the definition of a “personal service provider”
and which is in receipt of “remuneration” as defined in the Fourth Schedule
is subject to the deduction of employees’ tax.
In determining whether a company, close corporation or trust is a “personal service
provider” and whether or not employees’ tax is recoverable from payments made to
them the following tests should be performed:
a) Determine whether or not some or all of the receipts of the company, close
corporation or trust consist of “remuneration” as defined in the Fourth
Schedule. If the receipts do not include “remuneration” as defined, no
employee’s tax is deductible. The definition of the term “remuneration” excludes
payments made to independent contractors that are natural persons or trusts.
The exclusion does not apply to personal service providers. There is no need, as
a result, to determine whether the personal service provider is an “independent
contractor” for purposes of the Fourth Schedule. If remuneration is paid or
payable, proceed to the next test.
b) Determine whether the service is rendered personally by any person who is
a connected person in relation to the company, close corporation or trust.
The term “connected person” is defined in section 1 and must be applied
accordingly. “Service” includes the provisions of a person to render a service or
work for a client (including, for example, companies, close corporations and trusts
operating as labour brokers). If the service is rendered personally by any person
who is a connected person in relation to the company, close corporation or trust,
proceed to the next test below. If it is not the case, the company, close
corporation or trust is not a “personal service provider” and it is not subject to the
deduction of employees’ tax.
c) Determine whether the company, close corporation or trust employed (or is
likely to employ) three or more full-time employees throughout the
particular year of assessment who are on a full-time basis engaged in
rendering the service, and who are not shareholders or members of the
company or close corporation, or connected persons in relation to the
person who is personally rendering the service or the trust. If this is not the
case, proceed to the next test below. If this is the case the company, close
corporation or trust is not a “personal service provider” and therefore not subject
to the deduction of employees’ tax.
Example 1 – Classification of a personal service provider
Facts:
X is the only member of ABC Close Corporation (the CC). She provides
information technology consulting services. The CC employs two other
consultants and an administrative assistant, all of whom are employed on a fulltime
basis for the full year of assessment and none of whom are connected
persons in relation to X.
Result:
Because the CC employs three full-time employees for the full year of
assessment, who are not members of the CC or are not connected persons in
relation to X, the CC will not be classified as a personal service provider.
d) Determine whether one (or more) of the following is true:
? Would the person who is personally rendering the service have been
regarded as an “employee” of the client if the service was rendered
directly to the client and not through the company, close corporation or
trust? For purposes of employees’ tax, the word “employee” is defined in the
Fourth Schedule and it is therefore necessary to determine whether the
person would have been an “employee” as defined. For example, if the
person would have been a person in receipt of remuneration or to whom
remuneration accrues as described in paragraph (a) of the definition of an
“employee”, the company, close corporation or trust is a “personal service
provider”. Following the example through, the test must also include a
reference to the definition of the term “remuneration” (because of its reference
in paragraph (a) of the definition of an “employee”), which excludes payments
made to common law independent contractors. If the person rendering the
service would have been regarded as an independent contractor under
common law the person would not have been regarded as an “employee”
in the absence of the company, close corporation or trust.
?
Must the person who is personally rendering the service, or the
company, close corporation or trust, perform the duties mainly at the
premises of the client, and if so, is that person subject to the control or
supervision of the client as to the manner in which the duties are
performed or are to be performed? The test is the same as the one used in
exclusionary paragraph (ii) of the definition of the term “remuneration”. If the
services are rendered mainly at the premises of the client and the client
supervises or controls the activities of the person rendering the service or the
activities of the company, close corporation or trust, the test is positive.
? Does more than 80% of the income of the company, close corporation
or trust from services rendered consist of or is likely to consist of
amounts received from any one client, or from any associated
institution in relation to the client? If more than 80% of the income of the
company, close corporation or trust consists (or is likely to consist) of income
from only one client, the test is positive. The reference to “income” in the test
is a reference to “income” as defined in section 1. It is necessary to isolate the
income received for the services rendered from the income received for other
activities of the company, close corporation or trust.
Example 2 – Determination of income (more than 80%) derived from
services rendered
Company A is in receipt of R100 000 for the year of assessment, of which
R90 000 is “income” as defined in section 1. R50 000 of the R90 000
represents income for services rendered. Of the R50 000, R42 000 (that is,
more than 80% of R50 000) was earned from services rendered to one client
and the test is therefore positive in respect of the company.
Section 23(k) limits the deduction of expenses which can be claimed by a personal
service provider to the following:
? -Remuneration paid to the employees of that personal service provider.
? -Legal expenses.
? -Bad debts.
? -Contributions to pension fund, provident fund or benefit fund for the benefit of
employees.
? -So much of any amount, including any voluntary award received or accrued for
services rendered or to be rendered or any amount received or accrued for or by
virtue of any employment or the holding of any office as was included in the
taxable income of that person and is refunded by that person.
? -So much of any amount contemplated in paragraph (cA) of the definition of the
term “gross income” (that is, restraint of trade payments) received by or accrued
to any person as refunded by that person.
? -Expenses for premises, finance charges, insurance, repairs and fuel and
maintenance cost for assets where the premises or assets are used wholly or
exclusively for the purposes of trade.
`As the personal service provider may claim any expense, deduction or contribution
listed above, it is apparent that a flat rate of tax applicable to personal service
provider may far exceed the actual net liability eventually owed. Therefore, to reduce
the cash-flow constraints, a personal service provider may apply at a SARS branch
office for a tax directive under paragraph 11 for a lower rate of tax that more closely
matches the final tax liability.
Labour broker
As of 1 March 2009, a labour broker is any natural person who conducts or carries
on any business whereby such person, for reward, provides a client with his or her
own employees to perform work for the client or procures workers for a client but
does not him or herself provide the services required by the client. A company, close
corporation or trust that provides such services may no longer be classified as a
labour broker.
A labour broker without an exemption certificate is subject to employees’ tax at the
rate applicable to individuals.
As of 7 February 2007, an exemption certificate may not be granted where –
a) more than 80% of the gross income of the labour broker during the year of
assessment consists of, or is likely to consist of, amounts received from any one
client of the labour broker or from an associated institution of the client, unless
the labour broker employs three or more full-time employees who are on a fulltime
basis engaged in the business of that labour broker and who are not
connected persons in relation to the labour broker. It is important to note that the
rule relating to the three or more employees does not apply to persons engaged
in other activities of the labour broker – they must be directly involved in the
labour broking activities of the labour broker; or
b) the labour broker provides to any of its clients the services of another labour
broker. This requirement does, however, not preclude a labour broker from
acquiring an employee from another labour broker for purposes of providing the
employee to a client. Where, for example, Labour Broker A is requested by a
client to provide a particular type of employee that it does not possess, and
Labour Broker A acquires this employee from Labour Broker B to become an
employee of Labour Broker A and forwards the employee to the client in the
normal way, Labour Broker A would not be penalised by this requirement
because the employee is provided to the client as an employee of Labour
Broker A. This requirement is applicable where, for example, a client is permitted
to hire an employee of Labour Broker B through Labour Broker A; or
c) the labour broker is contractually obliged to provide the services of a specified
employee to the client. This requirement is applicable where, for example, the
client prescribed or required Employee A to render the service. This requirement
is not applicable in circumstances where an employee of the labour broker was
chosen by name as a result of a bona fide selection process based on the
requirements of the client, and specified as such in the eventual contractual
agreement.
Example 3 – Determination of a labour broker
Facts:
The client requires an information technology auditor. Labour Broker A conducts
a selection process to determine the most suitable employee to render services
to the client. Ms. B is selected by Labour Broker A and in the contract between
the client and Labour Broker A, it is specified that Ms. B will render services to the
client.
Result:
In this case the selection process was not influenced by the client and the
exclusion is therefore not applicable.
With the exception of amounts paid to employees for services rendered,
section 23(k) prohibits the deduction of all expenses incurred by a labour broker for
which a certificate of exemption has not been issued.
Applicable tax rates
A labour broker without an exemption certificate is subject to employees’ tax at the
rates applicable to an individual.
In the case where the “personal service provider” is –
i) a company or close corporation, employees’ tax at the rate of 33% must be
withheld by the client (employer) of the company or close corporation; or
ii) a trust, employees’ tax must be withheld by the client (employer) at the rate
applicable to trusts (other than special trusts) which is currently 40%.